The federal government collected $350 billion from corporations in corporate income taxes last year. Economists have long understood and explain that the US federal (and state) corporate income tax rates are at the same time both too high and too low. Why do we say this? Well, the tax rate is, at the margin, very high – so high that corporations large and small famously expend billions of dollars of resources to avoid paying it. Most famously of course is GE’s 57,000 page return from 2011 on $14 billion of worldwide income. It’s tax bill that year was … zero.

So, the high rate encourages wasteful tax avoidance, and directs resources away from valuable production and into destructive zero-sum efforts to avoid taxes. So the result is that the effective rate collected by the government is “too low.” Now, I’m not a fan of taxing corporations any more or less than other entities. If you agree that the government needs to collect revenues, then we should have a shared interest in not doing so in an incredibly wasteful matter.* Furthermore, it’s not at all clear that “corporations” pay the corporate income tax even when they are not pulling a GE. Well, corporations, I’d hate to inform you, are not people. So, what people pay the corporate income tax? That question is to be answered by tax incidence studies. It must be either the customers of the corporations, the workers at the corporations, the owners of machinery/capital that the corporation employs, or the owners of the corporation itself. Maybe the tax hits a particular group of entrepreneurs – in other words, it discourages firms from incorporating in the first place, meaning we have a riskier, privately held, corporate structure. All people.

What we DO know is that it is NOT at all clear that the “evil capitalists” bear the burden of the corporate income tax – my reading of the literature is that much of it falls on workers, less on consumers. What we DO know is that corporate income tax revenues are a small slice of the government revenue pie. What we DO know is that firms make great efforts to avoid it, and governments spend great resources to enforce it. What we DO know is that the corporate income tax does almost nothing to the progressivity of the tax code, for those of you who care about such things. At the same time, we keep hearing about how important business is to the health of the country. We keep hearing about the creation of new jobs and so forth.

So here’s a radical proposal that should either annoy everyone or have some form of agreement between everyone (which means it can never happen ironically). Rather than tax corporations to get $350 billion per year. I hereby recommend that the U.S. government purchase an ownership stakein all American corporations that it currently wishes to tax. Yes, that sounds a hell of a lot like socialism, and it is. But I don’t see how that’s worse than what we have today (I’d go further and place the regulatory apparatus within each company this way too). We can structure the stakes so that they are passive – ensuring that company insiders maintain control. But the reason I propose this is that you would think a passive government investment in the corporations themselves would actually force them to do things that encourage businesses to be profitable and successful. It wouldn’t matter where businesses located, it wouldn’t matter whom they sold to, and so on, so we would not have to play all of those silly tax hiding and detection games. Instead, the government’s “take” would be either a function of the dividend payments from the corporate sector and/or the increase in the value of the shares that it held over time. I am sure people smarter than me could structure a more passive way for the government to make these investments – such as by purchasing huge index funds in the entire economy, or integrating such an idea into an NGDP futures market.

Last year, the entire corporate sector issued about $1 trillion in dividends. And this number is surely suppressed due to the tax treatment of such dividends. So, to generate $350 billion in annual income from corporations the government wouldn’t have to purchase 35% of each company, somewhat less I think. Of course the entire idea is insane and is precisely what you might predict leads to serious tyranny and oppression in the future for what I think are obvious reasons. But we are talking about changes from the current situation, not what the world would look like if we were designing it from scratch. And for me the tax and regulatory burden of the existing set up is so bad that you may have turned me, at the current margin, into a crazy National Socialist. I’d very much look forward to seeing the populists promote mandated wage legislation, burdensome workplace regulations, costly green-initiatives, etc. when their very own livelihoods are connected to it. Am I stupidly assuming that folks care about their own livelihoods enough to want to see a flourishing and profitable business community by giving everyone a direct shared interest in it? Or do people hate the idea of business and profits so much that they’d want to see all of us sink with the ship? Can we take this even further and end the entire system of taxes we have at all levels and simply have all taxpayers become “investors” in the economy at large?

My last question is not as stupid as you think. If you are an extreme technological optimist and labor market pessimist, that may indeed be the only option we have going forward – think about why.

* On the other hand, if a government can efficiently collect taxes, that may induce them to collect more than we agree they “need” … so blame Milton Friedman for suggesting the idea of automatic payroll deductions.

A powerful argument, WC. Come to my house and I will engineer a party where you and your entourage will find a red carpet and a scraper to clean your boots.

This is akin to my idea that Members of Congress should be required to invest maybe thirty percent per year of their gross income, which not only would include their salary but also investment income but also talking head and speaking fees, in two mutual funds, one being a bond fund and the other sixty percent in a Fortune 500 fund. And that would be it, no federal pension beyond Social Security. No double or triple dipping from the federal trough. The same goes for all staff employed beyond two terms, which would mean that they, too, would have to train for a real job instead of making a career of making other people miserable.

“Am I stupidly assuming that folks care about their own livelihoods enough…”

A good question, to which I think the answer is unfortunately, yes. Many of the people who call for such measures, own quite a bit of stock in companies that will be hurt by such measures, through their 401Ks for example. It doesn’t phase a professor of…lets say…sociology…one tiny bit to call for sorts of silly anti-capitalist measures, even while she stuffs her 401K with her own and the school’s contributions. Nope. Not one bit.

Overall, I think your idea makes “sense”. Perhaps not for the government, but it makes sense overall.

Just yesterday I was talking to some hardcore left-wing nut-job who kept screaming about how “Wal-Mart” makes too much profit and needs to give some of it “back!” to the workers. I thought to myself…why don’t Wal-Mart workers buy Wal-Mart stock? Then they would be getting that profit too. Whoever complains that someone makes…too much money…when you can get a piece of that money? And all you have to do, is click a few buttons on a screen to get it.

But, the majority of Americans…are…capitalists. The majority of us do own stock, in one form or another. The problem is, individually we may be too ignorant to know what’s best for that investment.

On the other hand, one catch would be making sure the government would be a truly passive and broadly committed investor, upon which we encounter all sorts of Hayekian epistemological questions. Moreover, any grand scheme such as this would be subject to political decisions that have led to the government recently investing in losers like GM, Solyndra, and the other companies where Al Gore sits as a director and receives his director’s fees in cash and stock options. Would RJR or Exxon be excluded? Would Exxon retail franchises get a big equity investment in their non-publicly-traded stock? If Mussolini or Harry Hopkins were around, we could solve these potential glitches, or hand the problem over to the Princeton economics department.

I like the idea of giving the government an equity position in chartered collectives. That’s right out of the old Berle and Means play book from the 1930s. They argued that high corporate taxes, back then collections were closer to 50%, were an acceptable, but not perfect substitute for properly charging collectives for the advantages of incorporation. Let’s face it, things like limited liability and immortality should be expensive, not nearly free as they are now. The system worked pretty well until the shareholder value movement in the 1980s, which was basically about making liquidation easier. (As Rhett Butler noted, there’s good money to be made in dismantling an empire.)
Unfortunately, it is just as easy to shaft old Uncle Sam with bogus equity positions, just as so many shareholders are shafted on a routine basis today. I suppose the government could simply require some percentage of any equity or equity related instrument that private parties wish to have enforced by the government justice system. It has to be pretty generally formulated, since it is all too easy to come up with an options or trust scheme to “hide” the actual value. It also has to be tied to the justice system, so that instruments that do not comply cannot be litigated, directly or indirectly. This was the theory behind the stamp tax. The so called tea party was a protest against the British government’s stamp tax, but, as every New Englander knows, the first legislation in Massachusetts after the Revolution was to impose its own stamp tax.

Interesting thought, though yes, insane. On a more pragmatic note, I am surprised that the idea of closing “loopholes”, (to which GE apparently devotes 57,000 pages toward pursuing) and reducing marginal rates has not gained more traction politically. It has obvious appeal to the red team, based on their rhetoric, but also the blue team, at least to the extent of closing those corporate-welfare loopholes. The best part is that lower marginal rates would reduce incentives on the part of management to lobby for new and bigger loopholes in the first place, right?

Maybe I’ve answered my own question with the last sentence. I suppose the last thing politicians of any stripe is to lose leverage in their ability to coerce corporations to cough up campaign contributions.